The Italian debt agency holds the only scheduled EMU bond auction

Rates

Yesterday, global core bonds and peripherals remained very well bid. The 10-yr bond yields of Germany, Italy, France, Spain, the Netherlands, Finland, Austria, Belgium, Slovakia, and Ireland all fell to levels never seen in the euro era. The law of gravity was still at work and as the 10-year German yield was so close to the 1.12% all-time low that the temptation to test it and take it out was irresistible. Of course, it needs to be confirmed by the end of the week, when a number of key eco releases and events have passed. Early on the rally started on equity woes (Banco Espirito Santo), but after equities recovered, core bonds remained strong, also helped by latent tensions surrounding Russia (sanctions) and month-end extension buying. US Treasuries traded more volatile with a temporary setback after stronger US consumer confidence, but following a strong 5-year Note auction, Treasuries closed also with modest gains. Flattening continued, also in the German bond market. Yield changes were not too different in US and Germany with declines up to 3-4 bps at the very long end.

Today, the eco calendar heats up with the European Commission’s confidence indicators, the German HICP inflation data, Belgian and Spanish Q2 GDP, the US ADP employment report and US Q2 GDP. The FOMC will announce its policy decisions and the ECB will publish its Bank Lending Survey. Italy (BTP/CCTeu) and the US (7Yr Notes) will tap the market.

In the euro zone, European Commission’s economic confidence is forecast to have weakened for a second consecutive month in July, albeit slightly. Despite the stronger PMI’s, we see risks for a downward surprise, partly due to weaker consumer confidence. In Germany, the HCIP inflation data will be interesting ahead of tomorrow’s euro zone data. After an uptick in June, German HICP inflation is forecast to have eased from 1.0% Y/Y to 0.8% Y/Y in July. For inflation data in July, we believe that the risks are for a downward surprise. Regarding the US GDP data, after an awful first quarter, US Q2 GDP is forecast to have increased by 3.0% Q/Q annualized, reversing the dip in Q1. Growth will mainly be based in personal consumption and inventories, while other contributions will probably be small. We believe however that there are risks for a downward surprise as growth in personal consumption and capex might be somewhat smaller than anticipated. Finally, the ADP employment report is expected to show a 230 000 gain in private sector hiring, down from 281 000 in June. The June ADP report was the strongest since late 2012 and a somewhat slower pace of hiring is likely in July.

The Italian debt agency holds the only scheduled EMU bond auction. It taps the on the run 5-yr BTP (€2.5-3B 1.5% Aug2019) and 10-yr BTP (€2-2.5B 3.75% Sep2024). Additionally, they’ll try to raise €1-1.5B by tapping a floating rate CCTeu (Nov2019). The auction will be supported by a €16B Bono redemption, a €27B BTP redemption and index extension buying. The bonds didn’t cheapen in ASW spread terms going into the auction and the Sep2024 trades a tad rich on the Italian curve. Nevertheless, Italian BTP’s offer a small premium over Spanish Obligacions which can be important for investors hunting for yield in the current positive market EGB’s sentiment. Overall, we thus believe that the auctions will go well. In the US, the Treasury continued its end-of-month refinancing operation with a strong $35B 5-yr Note auction. The auction stopped about a full bps through the 1:00 PM bid side with a good bid cover (2.81) and very good buy-side demand. Especially the direct bid (absent yesterday) was very large and aggressive. Today, the treasury concludes its refinancing with a $29B 7-yr Note auction and a $15B 2-yr FRN auction.

Overnight, most Asian are drifting sideways. Japanese stock hardly suffer from ugly IP data, whereas the South Korean Kospi outperforms on stellar IP numbers. The EU and the US agreed to their toughest sanctions against Russia since the end of the cold war but apart from e.g. a weaker ruble, there is little impact on global markets. The US Note future is somewhat lower.

Today, the eco calendar heats up. In EMU risks are for a lower German CPI and a weaker EC consumer confidence. While this is a positive for the Bund, quite some dovishness seems already discounted (new high yesterday).
Technical factors send mixed signals. On the one hand, index extension buying is a positive. On the other hand, the Bund approaches overbought conditions and reaches new highs (low in German 10-yr yield) yesterday.

In the US we have ADP, Q2 GDP and the FOMC statement. The former two will likely be overshadowed by the latter. Regarding the FOMC statement, we expect another $10B taper, but apart from that a verbatim repeat of last month. Risks are slightly skewed towards a hawkish surprise (Dissenter? Comments on excessive risk taking? Upgrade assessment economy/unemployment?) which could trigger losses for the US Note future if it occurs especially if preceded by better eco data.

Last week we changed our short term view to a sell-on up-ticks, preferably near the highs, as investors might have underestimated the signal from better EMU PMI’s.